TV streaming service Fubo (NYSE:FUBO) has seen incredible returns so far this year, with shares now up more than 180 percent on a trailing 12-month basis.
These soaring prices, however, have been driven largely by news of a pending merger, raising questions about how much more the stock can gain from here.
Could FUBO stock double again, or have the shares reached the limit of their valuation for the time being?
FuboTV’s Deal With Disney
The main driver of FUBO’s recent surge has been a merger between it and Disney’s Hulu+ Live TV business that was announced in January.
Under the agreement, the combined business will continue to operate as Fubo and would have over 6 million subscribers in the North American market.
The business would also carry Disney programming, including its sports programs. Under the terms of the deal, however, Disney will own 70 percent of the merged business, with Fubo shareholders receiving only a 30 percent ownership stake.
Disney’s involvement and the large group of subscribers Hulu+ will bring to the platform have buoyed investor sentiment, even as FuboTV itself has lost subscribers in its own right.
In Q1, the streaming service lost 206,000 net North American subscribers and over 40,000 in the rest of the world.
Although Fubo’s revenues rose in spite of lower subscriber counts, the business expects the trend to keep going. As such, most of the market’s reaction to FUBO stock right now appears to be driven by the prospect of its combination with Hulu+.
With that said, the deal with Disney would give Fubo a considerably enhanced ability to fund its growth. Aside from the organic synergies between the businesses and the addition of a large new subscriber base, Fubo will also receive a loan of $145 million as part of the transaction. This loan would help pad Fubo’s balance sheet and set the stage for investment in further growth.
Is Fubo Fairly Valued?
With shares already up so much in the last year, it’s surprising to note that FUBO is still only priced at 18.5 times earnings, 0.7 times sales, 3.2 times book value and 9.1 times operating cash flow.
Analysts also still see some upside left in FUBO, with the average price target of $4.33 still being more than 17 percent above the most recent price of $3.69. Even with this appreciable upside, though, the consensus rating on FuboTV is still a hold.
However, it’s possible that FUBO could be a bit of a value trap. With the shares already up massively in expectation of the Hulu+ merger, investors who pay today’s comparatively modest multiples could still be at risk of overpaying if the merger doesn’t create enough long-term growth for Fubo.
The Risks Involved in the Hulu Deal
For all of its promise, Disney’s involvement could also carry some hefty risks for Fubo shareholders. As more bearish voices have already noted, the overwhelming majority control Disney will gain over Fubo as a result of the deal is likely to put it in the awkward position of being operated largely for Disney’s benefit.
Even if that worst-case scenario doesn’t prove accurate, Fubo’s business will end up being operated with Disney’s best interests in mind more than those of FUBO shareholders.
Of particular concern is the fact that Disney will effectively be able to set its own fees for carrying its content on Fubo due to its majority control of the combined business.
This, in turn, is set to benefit Disney while limiting the cash flow and earnings growth that Fubo shareholders see from the merger.
Though this outcome obviously isn’t certain, the fact that Fubo will be controlled by another publicly traded firm with its own shareholders to answer to could be quite worrisome for those who own FUBO shares.
Even discounting this possibility, there are also potential legal risks associated with the stock. In late April, the DOJ launched an antitrust investigation into Disney’s decision to functionally acquire Fubo, citing concerns around competition.
Should the deal be blocked or delayed, FUBO shareholders will quite probably find themselves owning a stock that has soared in value on hopes of merging with a larger business, but which very likely can’t support that valuation on its own. It’s worth noting here, though, that a termination fee of $130 million for Fubo is part of the deal in the event of failure to obtain regulatory approval.
Can FUBO Stock Double From Here?
While it’s certainly not impossible that Fubo could double again, there do seem to be some considerable headwinds facing it.
To begin with, the market has already priced in the effects of the merger with Hulu, something that the DOJ may or may not attempt to block for competitive reasons. The fact that Disney will have an overwhelming majority control of the combined business is also concerning, as Fubo shareholders could find themselves playing second fiddle to the business interests of Disney.
It could also take quite some time for shareholders to find out how the merger will play out. The deal could easily take until the middle of next year to be finalized, even if legal challenges don’t arise. As such, the stock may not have a great deal of room to move higher in the coming 12 months.
Right now, FUBO may be a better hold than a buy, as there are several uncertainties surrounding the stock. With shares trading on expectations of future growth once the business is combined with Hulu+ Live TV, it’s far from difficult to imagine a significant selloff if that deal fails to go through or if it fails to produce the kind of earnings growth shareholders are looking for.
In the meantime, the fact that Fubo is losing subscribers, even though it is generating revenue growth at the same time, could be a worrying trend for investors looking at the business on its own. Until there’s a bit more clarity around some of these factors, FUBO could be too speculative and risky for many investors.
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